Bank of England invites feedback on “platform” model for a UK retail CBDC

The Bank of England has published a new discussion paper on Central Bank Digital Currencies for retail use. Notably, the paper outlines and invites feedback on a “platform” model CBDC. This model relies on interaction with the private sector and could create a wealth of new opportunities for commercial innovation. At the same time, it seeks to mitigate the risk of disintermediating the banking sector. The Bank emphasises that it has not yet decided whether to issue a CBDC and that the “platform” model is not the only option if it does. Still, the paper provides useful insight into the Bank’s current thinking and an opportunity to influence it. The deadline for feedback is 12 June 2020.

New discussion paper

The Bank of England has published a new discussion paper on the opportunities, challenges and design considerations around issuing a CBDC for retail use. The Bank emphasises that it has not yet decided whether to issue a CBDC. Rather, the discussion paper is intended to provide a basis for further discussion and exploration.

Opportunities and challenges

The Bank identifies that a retail CBDC could offer the following benefits:

Supporting a resilient payments landscape. The paper flags that retail payments are currently highly dependent on the card networks. Use of cash is declining and a lack of point-of-sale infrastructure has prevented wide adoption of the account-to-account payment model. A CBDC, as a new form of central bank money, could provide a useful contingency in the event of disruption to the card networks.

Avoiding the risks of new forms of private money creation. The Bank remains concerned about the risks presented by “stablecoins” and similar types of private money outside the regulated banking system. A CBDC could deliver a risk-free form of electronic money and thus reduce the demand for new privately issued money-like instruments.

Supporting competition, efficiency and innovation in payments. A CBDC could enhance the speed and efficiency of UK payments. The paper highlights certain inefficiencies in the card payment model. A CBDC could provide alternative payment methods for users. It could also encourage innovation by enabling firms to compete to offer CBDC-related payment services.

Meeting future payments needs in a digital economy. A CBDC could, for example, facilitate “programmable money” to enable payments to occur automatically upon the satisfaction of certain conditions. It could also pave the way for new payment models by making “micropayments” (i.e. payments for very small amounts) cost-effective. This could be useful, for example, in the digital media market (which currently relies on subscription or ad-based funding).

Improving the availability and usability of central bank money. Currently, the only form of central bank money available to individuals and (non-financial) businesses is cash, the use of which is in decline. A CBDC would provide these groups with a new form of risk-free money. This could increase the resilience of the payment system and also better enable monetary policy transmission.

Addressing the consequences of a decline in cash. Cash has certain unique benefits, including around privacy and financial inclusion. A well-designed CBDC could potentially deliver some of these benefits.

Enabling better cross-border payments. If designed around common standards, a domestic CBDC could enable more efficient cross-border payments in the future.

The main risk the Bank identifies is the potential impact on commercial banks if households and businesses move significant portions of their deposits into CBDC. This could have a direct effect on the amount and cost of credit that commercial banks provide to the economy, as well as wider implications for financial stability and monetary policy. The Bank is very conscious that this risk would need to be addressed in the design model.

The “platform” model

The Bank considers that any CBDC infrastructure it creates should be (i) reliable and resilient; (ii) fast and efficient; and (iii) innovative and open to competition. It sees private sector involvement as key to meeting the third principle.

With these design principles in mind, it outlines a “platform” model involving two key elements:

A core ledger provided by the Bank. This would be a technology platform which records the CBDC value and processes the payments made using CBDC. Payments would be made in real time and settled on a gross basis. This ledger would have limited functionality (e.g. it could process payments initiated by the sender and provide account balances). The ledger may or may not be held on a decentralised basis, but, in any case, the Bank would retain ultimate control over currency creation and destruction.

Private sector “Payment Interface Providers”. Payment Interface Providers would be authorised and regulated private sector firms that connect to the core ledger through an API. They would manage the interaction with end-users, by providing value-add services. These could range from basic services (e.g. in relation to user interfaces, identification, account management and authentication) to “overlay services” that provide additional functionality (through smart contracts, for example). Some Payment Interface Providers may also provide merchant services that allow businesses to accept CBDC payments.

Mitigating the impact on the banking sector

The paper concedes that if the CBDC is successful, a degree of commercial bank disintermediation is inevitable. However, it considers that the net effects on monetary policy and financial stability may be positive if the shifts are managed effectively. The Bank points to three tools at its disposal to help manage these risks:

Remuneration of the CBDC. The Bank can decide whether to pay interest on CBDC at all and, if so, at what level. By minimising the level of remuneration relative to commercial rates, it can provide a disincentive for households and businesses to move all their deposits to CBDC.

Structure and tiering of remuneration. For example, the Bank could pay a lower interest rate on CBDC than it does on reserves held by banks. It could also use reverse tiering so that CBDC balances above a certain level would pay less interest (and thus be less attractive as a primary store of value).

Limits on amount of CBDC that can be held. Another option would be for the Bank to impose hard limits on the amount of CBDC that each type of user could hold or on the convertibility of bank deposits into CBDC.

Next steps

The Bank has composed a list of questions around the impact of introducing a CBDC and its design. It has invited feedback and ideas from the public, technology providers, the payments industry, financial institutions, academics and other central banks and public authorities. The deadline for comments is 12 June 2020. Any eventual decision to introduce a CBDC will require government backing.